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Why Five Below's Growth Story Excites Investors

By Luis Sanchez CFA - Feb 20, 2020 at 5:00AM

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Five Below is a fast-growing, profitable discount retailer.

Discount retail has been one of the most successful business models of the past 10 years. Companies including Ross Stores and Dollar General have racked up huge gains by focusing on providing consumer value and steadily expanding store count.

Five Below (FIVE 6.71%) is a younger company, but it too is following the tried-and-true discount retail growth strategy. So far, the results have been strong, but what can investors expect going forward?

A simple retail concept

Five Below has a very straightforward concept: The company sells items priced $5 and below in its stores. The company focuses on kids and teenagers who want to buy toys, candy, or seasonal holiday items.

The company's strategy is to open locations in suburban shopping centers where families make regular trips for things like groceries or haircuts. The idea is that Five Below is a place to drop your kids off while shopping for more essential things. The store is a good place to quickly stop by to make some low-priced impulse purchases.

Five Below's store inventory is constantly changing as the company introduces new deals. This gives the shopper a reason to visit stores because they never know what to expect other than a low price. Combining low prices with fun is generally good for business.

A mother and daughter holding hands inside a toy store

Image source: Getty Images.

Rapid store count growth

Stores are not expensive to open because the inventory is cheap and the real estate isn't expensive. The company disclosed that a store can be established on as little as a $300,000 upfront investment. This has made it easy to open many locations quickly -- which the company has certainly done.

Metrics 2012 2013 2014 2015 2016 2017 2018 2019
Store count 244 304 366 437 522 625 750 900
Net new stores 52 60 62 71 85 103 125 150

Data source: Five Below Investor Presentation.

When Five Below went public in 2012, it had fewer than 250 stores open. Today, the company has 900 stores and plans to continue opening over 100 stores per year for the foreseeable future. Management has guided for 180 new stores in 2020 and believes the brand can reach 2,500 stores in the U.S. long-term.

Attractive financial results

The company's business model is working well. Customers are embracing Five Below's unique take on discount retail and the company has produced solid revenue and earnings growth.

FIVE Revenue (TTM) Chart

FIVE Revenue (TTM) data by YCharts

Over the past five years, the company has increased its sales by over 20% per year and has increased its bottom-line earnings at an even faster rate as it has been able to improve margins and buy back stock. Now that the company is approaching $2 billion in total revenue, growth has been slowing, but the company still expects double-digit revenue and earnings for years to come -- much higher growth rates than the average S&P 500 company.

Keeping it simple

In a stock market littered with unprofitable tech companies, it is refreshing to find a growth company with a straightforward concept and growth strategy that appears to be working. While there are other discount retailers, Five Below's specific concept is unique and therefore not easily susceptible to competition. These factors line up nicely for a good long-term stock pick.

Luis Sanchez has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Five Below, Inc. Stock Quote
Five Below, Inc.
FIVE
$147.38 (6.71%) $9.27
Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
ROST
$92.64 (2.75%) $2.48
Dollar General Corporation Stock Quote
Dollar General Corporation
DG
$256.78 (1.52%) $3.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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